Your no-nonsense guide to Bitcoin

Bitcoin may be a word you’ve heard a lot recently. In a nutshell, it’s a ‘cryptocurrency’, meaning it only exists electronically. But is it worth the sudden hype?

Bitcoin can seem confusing and the idea of using a new type of currency may not make sense, especially seeing as using our current currency system has been working so well for so long. So, the first question that should be answered is, what is bitcoin?

Put into simple terms without the technical details, bitcoin is meant to be a quicker, cheaper and more reliable form of payment than money tied to individual countries. Bitcoin is an online financial network that you can use to send payments from one person to another. In many ways, bitcoin is similar to how we would pay for good using a credit or debit card – although we have paid for the good, we don’t physically exchange cash. However, there are differences.

Bitcoin is decentralised. No one owns or controls the bitcoin network – an online ledger, known as the blockchain, keeps a secure record of each transaction. Blockchain technology means that no data entry can be either duplicated or deleted, meaning that the central ledger is always 100% accurate.

Anyone who registers to use bitcoin will need to create a bitcoin wallet, which is then added on to their computer or mobile device. It’s a peer-to-peer structure, with thousands of computers all over the internet working together to process bitcoin transactions.

Bitcoin can be used without having to link any sort of identity to it; the network doesn’t keep track of the users, only the addresses where the money is. Think of your bitcoin wallet as an email address. You have two pieces of cryptographic information or ‘keys’ – a public one and a private one. The public key is what is known as the bitcoin address; anyone can look it up and send bitcoins to it – even if you don’t know them. And the private address is similar to your email password, only with the private key can you send bitcoins from it. To send bitcoins from an address, you have to prove to the network that you own the private key that corresponds with the public address. With us so far?

Bitcoin first came on the scene in 2009, however when it first became popular and was mainly used for illegal purposes, it was hugely unreliable, leaving little confidence in the stability of the virtual money. Historically, the currency has been volatile, but with that in mind there has been a recent boom, making more people interested in using it as their first choice of currency, or simply as an investment with which to exchange traditional currencies against at a later date.

If you’re wondering where bitcoin comes from and how it goes into circulation, the answer is that it gets ‘mined’ into existence. Bitcoin mining adds transactions to the blockchain and it also releases new bitcoins. In very simple terms, mining is the process of solving complicated maths problems every 10 minutes. When the problem is solved successfully, you have the right to put the next block on the blockchain and get a reward for working out the calculation. The network then verifies your answer, and accepted bitcoins are released to you. Bitcoin mining aims to serve three preliminary purposes – to process financial transactions, to fairly distribute new wealth and secure the network.

This is where bitcoin allows you to make money, through mining. Once you have solved the equation you will receive a reward. It has been criticised as of late because, in order to actually solve one of the equations, there needs to be a complicated software downloaded onto your computer, and the power to run the software costs more than the reward you would get in return. Also, over the years, the problems have become so difficult to solve that it’s almost impossible for an individual to solve on their own.

But there has been a way around the problem by creating a mining pool. It’s a great way to reap a small reward over a short period. A mining pool allows miners to pool their resources together and share their computing power while splitting the reward equally according to the number of shares they contributed to solving a block.

Although bitcoin is a currency, at the moment, it does seem like a better investing tool than a spending one. Because bitcoin isn’t tied to any country’s currency, its value fluctuates all the time. That value is simply pinned to the demand of the currency, and supply is based on factors like the creation of bitcoins through mining.

Because the value of a single bitcoin has skyrocketed in recent months (thanks to there being more demand than supply), most people who own bitcoins hold on to them rather than spending them. Since there is no central authority trying to keep the value around a certain level, it can vary dramatically. At the moment, one bitcoin equals AED 9,536, however that can increase or drop in a matter of minutes, (at the time of writing, within five minutes bitcoin raised in value to AED 9,568.60).

However, you can use bitcoins here in the Middle East at online and offline stores such as The Pizza Guys (this store became the first merchant in Dubai to accept bitcoins in 2014). You can even spend your bitcoins on Coin Forest, a Groupon-type website that takes payment in bitcoins.

Bitcoin is still fairly new to the UAE, and there may not be as big of a market here as there is overseas. However, with the ever-growing interest and the banking world moving towards a cashless society, there is no denying that bitcoin could grow bigger than it is today.

Is it a worthy investment? Well, timing the traditional foreign exchange market to invest correctly is hard enough. Timing bitcoin, which moves based on nothing but who wants it today, is even harder. If you’re looking to invest in bitcoin do consider it as a high-risk investment.

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